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Executive Summary (Extract)
The dramatic growth of mobile services in Africa has been well documented and outstanding enough to make us run out of superlatives to describe it. The expansion has continued unabated over the past three years, with a number of net subscriber additions consistently higher than the previous year’s.
The boom is not over, despite the global economic downturn. We expect African mobile operators to add another 300m subscriptions between 2008 and 2013, taking Africa’s mobile subscription base to 700m. Most markets will increase their mobile penetration by a factor of at least 1.5x. Ten markets will have a penetration rate above 100% by 2013; some will double their penetration levels and at least one (Rwanda) will quadruple it by 2013.
Nonetheless, there is more to the African mobile growth story than gaudy top line revenue and subscriber growth figures. A third to half of all African mobile operators are not profitable on a net basis; at least a third are unlikely to see net profits over the next 2-3 years. Our analysis lays bare a market that offers a remarkable blend of stupendous value creation alongside ostensibly misguided value destruction, can’t miss profit machines at the top versus volatile opportunities at the bottom, and pervasive premium valuations (at least until recently) for what is increasingly a Darwinist, commodity business.
Our analysis of African mobile market economics and long term prospects has led us to make the following points:
The Baseline - Solid top growth all around
By our estimates, the African market reached about 375m subscribers in 2008, up from about 280m in 2007. The overall subscription base is nearly three times larger than it was in 2005. It has grown by a compound annual average around 40% over the 2005-2008 period.
The pattern of growth is widespread; the median subscriber CAGR for individual markets over that 2005-2008 period was around 55%. Median African penetration was about 40% in 2008, and two thirds of African markets have a mobile penetration higher than 30%. The overall subscription base has a number of characteristics: it is heavily prepaid, churn is high and data adoption remains SMS-focused.
Our projections for the next five years suggest continued subscriber growth, even with slowdowns driven by tightening addressable markets and the law of big figures. Half of all African markets have nominal penetration rates lower than 40%; a dozen have penetration rates lower than 30%, leaving ample room for growth over the next five years. Further, the decline in the cost of 2G radio infrastructure has made deployments more affordable and network coverage continues to expand into rural areas, expanding the addressable market.
Finally, African mobile business models now put a premium on scale building, leading new operators to flood the market with SIM cards and driving up top line figures.
The Model: A business in transition - commoditised revenue, tough opex, high capex requirements
Behind the solid top line numbers, we see a business that is undergoing a dramatic transformation from premium, value-based models to the scale-focused approaches more typical of commodity businesses. The African mobile model has long ceased to be about skimming profits from the few; it’s now about building volumes and driving profits through scale efficiencies and the sheer power of massive numbers. Today’s models evolve in three main steps: initial focus on scale (for this is the price of market relevance), build-up of a loyal base (a “club”) and the leveraging of the club to raise ARPU levels, primarily through an expansion of the application portfolio.
OpEx remains a problem: Operating expenses are growing faster than revenue in most cases, partly a result of cost of sales keeping up with revenue and high fixed costs that rise with inflation (e.g. salaries) or fuel prices. Average OpEx per subscriber is around $90 on an annualized basis, with a median of $80. With marginal ARPUs already around $5, late entrants face the challenge of bringing their OpEx/sub below $50 over the long term, a tough proposition.
The importance of CapEx further comes to the fore with the tightening of credit markets anticipated in 2009. We estimate that at least a third to half of all annual CapEx is financed through debt and equity injections. With those channels tightening up, operators that are able to finance capital growth with internal cash are in a stronger position. The others will require debt and/or equity funding. With half of Africa’s operators being third entrants and beyond, a severe financing crunch will compel budget cuts or at worst, drive some players out of business.
The Bottom Line: Great at the top, not so good at the bottom
On the surface, African mobile operations are extremely profitable; stories abound of triple digit subscriber growth, seemingly boundless potential, and an overall environment in which operators need only build it, have customers flow in and print the money. If only things were that simple.
The reality is more complicated, a singular blend of can’t miss opportunities and a smorgasbord of operations with questionable return potential. Median EBITDA margin in our market leader and challenger sample was 43% in 2008, a fairly high level. Including third operators and other late entrants, we estimate that median African EBITDA margin falls to about 25%.
We see ARPU as a poor indicator of operator performance in African markets - that is once it falls below $10. To be sure, there is some relationship between ARPU and bottom line performance. The median EBITDA margin for operators with ARPUs above $15 was 46%, an indication that ARPU does matter at some level. Nonetheless, upper $15 ARPUs are not the norm, with the African average at $11. At sub-$10 levels, there is substantial dispersion in EBITDA performance, with margins ranging from 0% to 45%. The point isn’t that ARPU is useless; it is that it should be given its proper weight given the market environment.
Finally, long term consolidation is inevitable, in our view. The combination of high initial capital requirements and low returns virtually guarantee that equity holders will be keen to cash out within that initial five year period when the operation eats more cash than it generates.
Further, the market now seems awash with 'build and flip' models, operations built to generate investor returns through capital gains: get license, maximize number of SIM cards, sell.
The Players, Valuation and M&A: Inflation, depression, consolidation
In a business largely defined by scale, multi-country players such as MTN, Zain, Orange or Vodacom are the best investments around, in our view –though there certainly are exceptions. To reach the cost and price sweet spots that make the business attractive and allow to raise service penetration levels, operators need to generate economies of scale; yet, few markets (fewer than 10 out of Africa’s 53, by our count) are large enough to provide such scale.
In turn, operators look to build it through multi-country presence. Pan-African players account for 73% of the African subscriber base, nearly 70% of generated revenue and almost $0.70 of each dollar invested in African mobile markets. Their share of EBITDA is difficult to estimate, but is higher than their share of revenue.
African mobile assets have witnessed substantial inflation over the past few years, owing to a mix of factors; the overall sense of mobile as a “can’t miss” business opportunity as more first tier operators report strong profits, supply and demand dynamics, the influx of financing from oil-rich regions, first tier operators (e.g. Zain, MTN, Orange) with cash to spend and few obvious places in which to spend it, and the “Benin precedent”, in which governments unilaterally decide to up prices.
The global economic downturn, combined with some overselling of mobile operator shares on a number of African stock exchanges have now contributed to depress mobile asset values, with some assets trading for 20% to 50% of their 2008 IPO prices. The tide now appears to have turned too hard the other way.
Report Structure
This report is organized into seven main related, but independent sections: The first section provides to line subscriber performance at African level and for 33 individual markets, as well as our long term projections. This section lays out the general supply and demand framework at the core of our forecasts, and outlines the key assumptions guiding our projections on a market-by-market basis.
The second section focuses on drivers of revenue and overall ARPU dynamics: Pricing models, elasticity, usage patterns and traffic volumes are reviewed here, along with the dynamics surrounding interconnect and mobile data revenue.
Section 3 breaks down operating expenses, reviews the main OpEx items including cost of sales (SIM cards, commissions, etc.), network costs, staff costs and G&A. The overall focus is on their current level and projected evolution in light of anticipated market conditions.
Section 4 is our CapEx section - it provides a review of the drivers of CapEx, as well as estimates of CapEx allocation by network item. We also provide an analysis of the true impact of CapEx on operational performance, as well as the implications of the global credit crunch for African operator spend.
Section 5 provides an analysis of operator current EBITDA levels as well as our analysis of African mobile profitability. In many respects, this is the heart of the report, building on insight from the previous sections to provide the AfricaNext Research view on a number of key questions: what are the main drivers of EBITDA? What do the most profitable players have in common? How many operators can African markets support? How relevant is ARPU to the bottom line in the African context and more..
Section 6, is the Valuation and M&A section - we review the evolution of mobile license values in Africa, as well as the value of M&A transactions in the mobile space and the outlook for 2009.
Section 7 provides our review of the Continent’s Pan-African players, including market presence, revenue, profitability levels, strategic issues and medium term outlook.
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Table of Contents
LIST OF EXHIBITS ..
LIST OF ABBREVIATIONS ..
EXECUTIVE SUMMARY: ALL THAT GLITTERS ISN’T GOLD .
THE BASELINE - SOLID TOP LINE GROWTH ALL AROUND
THE MODEL: A BUSINESS IN TRANSITION - COMMODITIZED REVENUE, TOUGH OPEX, HIGH CAPEX REQUIREMENTS
THE BOTTOM LINE: GREAT AT THE TOP, NOT SO GOOD AT THE BOTTOM
THE PLAYERS, VALUATION AND M&A: INFLATION, DEPRESSION, CONSOLIDATION
REPORT STRUCTURE
SOME PRELIMINARY OBSERVATIONS
AFRICAN MARKETS ARE NOT CREATED EQUAL: FROM VALUE TO VOLUME OPPORTUNITIES
SECTION I AFRICAN MOBILE SUBSCRIBER REVIEW
1.1 AFRICAN MOBILE SUBSCRIBER BASE GROWTH: THE BOOM IS NOT OVER
1.1.1 KEY ADOPTION CHARACTERISTICS: PREPAID, CHURN, VOICE
1.1.2 MOBILE PENETRATION: AVERAGE NOMINAL PENETRATION NOW AT 45%
1.2 MOBILE SUBSCRIBER FORECASTS: HOW THE 100% PENETRATION BARRIER WILL BE SMASHED
1.2.1 DEMAND SIDE ASSUMPTIONS: OF ADDRESSABLE MARKETS AND MOBILE VOICE PRICE ELASTICITY
1.2.2 SUPPLY SIDE DYNAMICS: COMPETITION, LOW COST MODELS AND NETWORK EVOLUTION
1.2.3 OUR PROJECTIONS: A 700M SUBSCRIPTION TARGET FOR 2013
SECTION II ARPU & REVENUE DYNAMICS
2.1 OUTGOING VOICE REVENUE: THE PATH TO COMMODITIZATION
2.1.1 PRICES: HIGH, BUT DECLINING
2.1.2 EVOLUTION: GIVING AWAY MINUTES TO PROTECT ARPUS
2.1.3 USAGE: CONDITIONS RIPE FOR MOU UPWARDS TREND
2.2 INTERCONNECT REVENUE: WILL TREND DOWN
2.3 FROM SMS TO MOBILE DATA AND MONEY TRANSFER - THE WILDCARD
2.3.1 MOBILE INTERNET - TREMENDOUS UPSIDE
2.3.2 OTHER VAS - FROM ONE-NETWORK ROAMING TO MOBILE BANKING - BEYOND THE HYPE, ALL ABOUT CHURN
2.3.3 ARPU: TOWARDS SUB-$5 LEVELS
2.4 TOP-LINE REVENUE: A $44BN BUSINESS AND A $65BN TARGET
SECTION III OPEX: LOOKING FOR LOW-COST MODELS
3.1 TOP LINE OPEX: GROWING FASTER THAN REVENUE
3.2 COST OF SALES: THE INTERCONNECT CHALLENGE
3.2.1 INTERCONNECTION COSTS: A HURDLE FOR LATE ENTRANTS, BUT LOOKING GOOD
3.2.2 ACQUISITION COSTS AND DEALER COMMISSIONS
3.3 OPERATING EXPENSES: FEW PLACES TO GO BUT UP
3.3.1 NETWORK EXPENSES: CONTROLLING CELL SITE COSTS, PUSHING SELF-PROVISION .. .
3.3.2 STAFF COSTS: BETWEEN EXPATRIATES AND THE OUTSOURCING OF CUSTOMER CARE . .
3.3.3 G&A: LARGELY STABLE
3.3.4 MANAGEMENT FEES: LEGITIMATE OR SHORTSIGHTED? .. .
SECTION IV CAPEX: LE NERF DE LA GUERRE .
4.1 CAPEX: THE PRICE TO PLAY
4.2 CAPEX DRIVERS: NIGERIA, CAPACITY, TRANSMISSION
4.3 THE CAPEX DIFFERENCE: CORRELATION TO MARKET SHARE AND REVENUE
4.4 THE CAPEX IMPACT OF THE CREDIT CRUNCH
SECTION V THE STATE OF AFRICAN MOBILE PROFITABILITY & THE FUTURE OF THE MODEL .
5.1 STATE OF PROFITABILITY - A TOP HEAVY EBITDA MARKET
5.2 THE DRIVERS OF AFRICAN MOBILE PROFITABILITY - AND WHAT WILL HAPPEN TO THEM ..
5.2.1 ARPU: A TENUOUS CORRELATION TO PROFITABILITY
5.2.2 MARKET SHARE: CRITICAL TO PROFITABILITY
5.2.3 OTHER DRIVERS OF PROFITABILITY: GROSS MARGINS, TERMINATION RATES AND NETWORK SELF-PROVISIONING .. .
5.3 CAN AFRICAN MARKETS SUPPORT 4+ OPERATORS?
5.3.1 REDEFINING VIABILITY
5.3.2 LATE ENTRANT PERFORMANCE TO DATE - MIXED
5.3.3 IDENTIFYING SUCCESSFUL LATE ENTRANT OPPORTUNITIES ..
5.3.4 THE BOTTOM LINE ON LATE ENTRANTS - FORGET ABOUT DIVIDENDS
5.3.5 IMPACT OF LATE ENTRANTS ON INCUMBENT BOTTOM LINE - NEGATIVE
5.4 HOW WILL THE 2009 CREDIT CRUNCH CHANGE THE OPERATING LANDSCAPE?
5.5 THE NEXT BUSINESS MODEL: CONVERGENCE VS. BOTTOM OF PYRAMID MODELS
SECTION VI AFRICAN M&A CONTEXT & VALUATIONS: FROM INFLATION TO DEPRESSION?
6.1 LICENSE VALUATIONS .
6.2 GLOBAL RECESSION EFFECT ON LICENSE VALUATIONS
6.3 A DEPRESSION IN MOBILE OPERATOR VALUATIONS: GOING TOO HARD THE OTHER WAY?
6.4 BREAKING DOWN M&A CATALYSTS FOR 2009
SECTION VII SIZING UP PAN-AFRICAN PLAYERS: FROM MTN AND ZAIN TO WARID AND SUDATEL
7.1 THE WEIGHT OF THE PAN-AFRICAN PLAYER .
7.2 LATE ENTRANT PAN-AFRICAN PLAYERS - THE CASE FOR (AND AGAINST) WARID, SUDATEL OR LAP GREEN NETWORKS
7.3 LATE ENTRANT PAN-AFRICAN REVIEW
7.3.1 SUDATEL: MORE CAPEX NEEDED, CDMA FOCUS CREATES CHALLENGES
7.3.2 WARID TELECOM: STRONG PERFORMANCE, CHALLENGING ECONOMICS
7.3.3 LAP GREEN NETWORKS: BUILDING UP TO SELL? . .
7.3.4 OTHER PLAYERS - TELECEL GLOBE, COMIUM, LINTEL, BINTEL
LIST OF EXHIBITS
FIGURE 1 African Market Tiered Matrix
FIGURE 2 Evolution of Africa Mobile Subscriber Base 2005-2013
FIGURE 3 Evolution of Africa’s Nominal and Real Penetration 2005-2013
FIGURE 4 Market Distribution by Mobile Penetration - 2008 and 2013*
FIGURE 5 Africa Top 25 Markets - Mobile Subscribers 2008
FIGURE 6 Africa Top 25 Markets - Nominal Mobile Penetration 2008
FIGURE 7 Africa Mobile Subscriber Projections by Country - 2006-2013 (thousands)
FIGURE 8 Africa Mobile Subscriber Penetration by Country - 2006-2013
FIGURE 9 African Mobile Service Demand Elasticity
FIGURE 10 Proportion of income spent on mobile by low-end/Informal sector and middle class - sample markets
FIGURE 11 The Three Phases of the African Mobile Business Model
FIGURE 12 Average Airtime Prices vs. GDP per Capita (PPP)
FIGURE 13 Evolution of Prepaid Peak Airtime - Sample Markets
FIGURE 14 Peak vs. Off-peak Airtime Per Minute Rates for 50 Sample Operators
FIGURE 15 Evolution of Effective Revenue per Minute* in Sample Markets
FIGURE 16 Sample Pricing Schemes in African Markets: From Flat Rate to Targeted Cuts*
FIGURE 17 Average Monthly Minute of Use per Subscription in Sample African Markets - 2008
FIGURE 18 On-net/Off-net Differentials for 50 Sample Operators
FIGURE 19 Evolution of Mobile Termination Rates in Sample Markets*
FIGURE 20 Evolution of Broadband Subscriptions in Africa
FIGURE 21 Evolution of ARPU in 33 African Markets (US$)
FIGURE 22 Nominal vs. SIM-adjusted ARPU in Select African Markets
FIGURE 23 Africa Mobile Services Revenues 2006 - 2013 (US$m)
FIGURE 24 Distribution of Africa Mobile Services Revenues - 2006-2013
FIGURE 25 Africa Top 20 Markets - Revenue 2008E
FIGURE 26 Africa’s Top 50 Mobile Operators by Revenue (US$m)
FIGURE 27 OpEx/Sub in Sample African Markets (incl. Cost of Sales)
FIGURE 28 OpEx vs. Revenue growth for sample Operators
FIGURE 29 Cost of Sales as a Proportion of Total Operating Costs (OpEX + COGS)* for Selected Operators
FIGURE 30 Cost per Gross Acquisition: African Prepaid GSM vs. Data Subscriber
FIGURE 31 Breakdown of Operating Costs for African Mobile Operator (excl. Cost of Sales)
FIGURE 32 Monthly Network Cost per Site in Selected Markets
FIGURE 33 Breakdown of Site Rental Costs - Sample West African Market
FIGURE 34 Staff Costs per Employee in Selected Markets
FIGURE 35 Evolution of African Mobile Capital Expenditures and Capex/Revenue 2006-2013
FIGURE 36 CapEx/Revenue - African Operators vs. Global Peers
FIGURE 37 Marginal CapEx per Subscriber in Selected Markets
FIGURE 38 Network Coverage of Population in Selected Markets
FIGURE 39 Network CapEx Allocation for Tier 1 - Tier 3 Players, 2008.
FIGURE 40 CapEx Share vs. Revenue Share in African Markets
FIGURE 41 Free Cash Flows for Selected African Operators*
FIGURE 42 EBITDA Volume Distribution - Sample of 43 Operators
FIGURE 43 EBITDA Margins for 40 Sample African Operators
FIGURE 44 African Mobile ARPU vs. EBITDA Margin Mapping
FIGURE 45 African Mobile EBITDA Margin vs. Market Share
FIGURE 46 Gross Margins vs. EBITDA Margins in African Markets
FIGURE 47 Market Share Three Year Post-Market Entry for Sample Late Entrants
FIGURE 48 Assessing Viability: Market Share, ARPU and Low/High Viability Mapping
FIGURE 49 Where Late Entrants Make Sense: Market Potential vs. Penetration Mapping
FIGURE 50 Cumulative 2-year Change in EBITDA Margin Post-Entry of Aggressive New Operator(s) (percentage points)
FIGURE 51 Impact of Liquidity Crisis on African TMT Market - A Survey of Africa-focused Investors
FIGURE 52 Mapping African Mobile Models - Applications vs. Target Markets
FIGURE 53 Acquisition of ISPs by MNOs in Sample African Markets
FIGURE 54 Africa Mobile License Table
FIGURE 55 License cost as a proportion of Year 5 revenue for sample investments
FIGURE 56 Bids for Rwanda’s third unified license
FIGURE 57 Key DCF assumptions for Rwanda’s third unified license
FIGURE 58 Africa Telecoms Transaction Table - Subscriber Valuations, EBITDA and Revenue Multiples for 40+ Transactions - 2000-2008
FIGURE 59 Evolution of Safaricom Kenya and Zain Zambia P/E - IPO to March 2009
FIGURE 60 Evolution of Median Subscriber Valuation, Revenue and EBITDA Multiples for Africa Telecoms Transactions - 2006-March 2009
FIGURE 61 Pan-African Operator Cash Position & Expansion Opportunities
FIGURE 62 Breaking Down Pan-African Players - Subscribers, Coverage, African Revenue, EBITDA and CapEx
FIGURE 63 Pan-African Player Share of Subscribers, Revenue and Capital Expenditure - 2008
FIGURE 64 Pan-African Players Subscriber Base - 2008
FIGURE 65 Pan-African Players Africa Revenue*
FIGURE 66 Pan-African Player Market Upside - Additional Revenue Potential of SSA Markets* in Which Operators are Active
FIGURE 67 Pan-African players Upside: Number of Top 20 Markets in which Operator is Present
FIGURE 68 Pan-African Players Sub-Saharan Africa EBITDA - 2008
FIGURE 69 Pan-African Player Market Upside - Additional Revenue Potential of Markets in Which Operators are Active
FIGURE 70 Sudatel Selected Operational and Financial Indicators
FIGURE 71 Warid Selected Operational and Financial Indicators
FIGURE 72 Lap Green Selected Operational and Financial Indicators
FIGURE 73 Selected Operational and Financial Indicators for Telecel Globe, Comium, Lintel, Bintel, HITS
BOX ANALYSIS - HOW ELASTIC IS DEMAND FOR MOBILE VOICE SERVICES IN AFRICA?
BOX ANALYSIS - WHY THE GLOBAL ECONOMIC DOWNTURN WILL NOT IMPACT MOBILE SERVICE SUBSCRIBER GROWTH
BOX ANALYSIS - ARE SUBSCRIBER NUMBERS CREDIBLE?
BOX ANALYSIS - WRONG ON RWANDA’S THIRD LICENSE - OR WERE WE?
SAMPLE COMPANIES MENTIONED IN THIS REPORT
ALink
Atlantique Telecom
Bintel
Cell C
Chinguitel
Comium
Econet Kenya
Essar
Etisalat
France Telecom/Orange
Gateway Communications
Globacom
Helios Towers
HiTS Africa
Lap Green Networks
Libertis Gabon
Lintel
Maroc Telecom
MCEL Mozambique
Millicom
MTN Group
MTN Cameroon
MTN Nigeria
MTN South Africa
Orange Kenya
Orascom Telecom Algeria
Oricell
Portugal Telecom
Rwandatel
Safaricom
Sahelcom
Smile Communications
Starcomms
Sudani
Telecel Globe
TNM Malawi
Unitel Angola
Vodacom Group
Vodacom South Africa
Vodafone
Wana
Warid
Warid Congo
Zain Group
Zain Congo
Zain Zambia
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